Post on 31-Mar-2015
Econ 4999Health Economics
Lecture 1:
Introduction
Class information
Class website http://www.colorado.edu/ibs/hb/barham/courses/econ4646/
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Password: arrow1963
Syllabus: Updated version on class website
Outline
■ What is health and health care?
■ What is health economics?
Why is it important?
What makes the health care market different from the market or other goods?
What type of questions do health economists ask?
What is health
Health is a multifaceted concept and not easily measurable.
WHO definition: Health is a state of complete physical and mental
well-being and not merely the absence of disease or infirmity (WHO, 1948)
Refer to peoples’ health status (how healthy they are).
What is health
Important part of human capital Human capital: value of learning, experience and
ability embodied in workers which increases productivity and income.
Asset: accumulates and depreciates
Individual or households can improve their health through use of health care, diet .. Production of health
Health Production Functions Determinants of health
What is health care?
Definition: The prevention, treatment, and management of illness and the preservation of mental and physical well-being through the services offered by the medical and allied health professions.
What is health care? Important difference between health and
health care Health care can be traded on the market but
health cannot.
Demand health care to improve our health Demand for Health Care
Health care markets differ from markets for other commodities Role for Government
Roots of health economics
Emerged as a sub discipline of economics in the1960s with the publication of two important paper:
1. Kenneth Arrow (1963) “Uncertainty and Welfare Economics of Medical Care” The American Economic Review.
2. Mark Pauly (1968) “The Economics of Moral Hazard: Comment” The American Economic Review.
Concerned with the health market not with health or health status.
What is health economics?
1. Health economics is the study of how (scarce) resources are allocated to and within the health economy.
Production of health care (doctors, specialists, or nurses).
How do we distribute health care across the population? Based on who can pay or who needs it or
some combination. How much money should the government
spend on health care?
What is health economics?
2. Demonstrates the magnitude and importance of the health sector
e.g. How fast it might be growing and why
3. What makes it different from other markets and how our analysis may need to adjust
4. Models the determinants of health status and looks and how government policy might improve health status in short and long run
Why is it important?
1. The size of the health economy is large and growing
2. Role of government in the health care markets
3. Health care market is difference from other markets
4. Externalities
Why is it important?1. Health economy is large and growing
Figure 1-1 US Health Expenditures Shares, 1960-2003
0
2
4
6
8
10
12
14
16
1960 1965 1970 1975 1980 1985 1990 1995 2000Year
Ex
pe
nd
itu
res
as
a %
of
GD
P
Source: Organization for Economic Cooperation and Development, Health Data 2005.
The size of US health economy GDP: The market value of final goods and
services produced within the borders of a country in a year.
1980s: Rise in shares Increase in insurance coverage and FFS
system Introduction of more market based policies
1990s: Expenditures flattens out Managed care introduced
Could just be an decrease in the denominator.
National US Spending on Health Care
Year NHE Growth % GDP
1960 36.7 5.1
1970 73.1 10.6 7.0
1980 245.8 12.9 8.8
1990 696.0 11.0 12.0
1995 990.3 7.3 13.4
2000 1310.0 7.0 13.4
2006* 2077.5 7.3 16.0
Per Capita
Nominal Real
143 483
348 897
1067 1295
2,738 2095
3,698 2427
4,672 2713
6,830 N.A.(In billions of dollars); * = projectionNumerator is increasing
NHE = National Health Expenditures
Out-of-Pocket and Federal Expenditures -Table 1-5 FSG
Total Out-of- Third Federal
Pocket % Party % %
1960 25.0 12.9 52 12.1 48 2.2 9
1970 67.3 25.1 37 42.2 62 15.6 23
1980 233.5 58.2 25 175.2 75 66.1 28
1990 669.6 137.1 20 532.3 80 181.9 27
2003 1614.2 230.5 14 1384 86 507.5 31
(In billions of dollars)
Medical care prices (CPI), 1960-2004
1960 1980 2004
ALL
Hospital services
Presc. drugs
Personal Consumption, 2001Food and Tobacco 15.3
Housing 14.3
Medical Care 18.2
Hospital and nursing 7.3
Transportation 11.4
Household Operation 10.7
Recreation 8.5
Clothing 5.9
Other 15.6Source: FSG Table 1.2
Personal Expenditures
Medical care is the largest category. Most of this is for hospitals/nursing homes Need to think how policy affects this category
Uninsured go to emergency rooms
In 1960 food was 25%, housing 15%, and medical care 5%.
There has been a big shift in spending patterns. May represent a richer society.
Personal Expenditures
What have we not accounted for in personal expenditures?
Opportunity cost of your own time Time spent caring for sick or disabled Decreased with more spent on nursing home? Very important in developing countries
US compared to OECD countriesTable 1-1: health expenditures % GDP, OECD Health expenditures grew rapidly between
1960-1980 for most countries.
Rates continued to rise in1990s in US.
US is the biggest spender.
Twice as much as the UK (national health insurance).
Questions for you to think about1. Why do you think health care spending is
higher in the US than in other countries?
2. Is the fact that the US population spends more per capita on health care than people in any other developed country evidence of a failure of the US system?
Why is it important?
1. The size of the health economy is large and growing
2. Role of government in the health care markets
Role of Government
Participate because of market failures Demand side
Provision of insurance Effort to affect health behavior
Supply side Price controls Restriction of entry/exit Subsidize research Tax policy
and much more …
US health care spending, 2003Government is 45 % of total health spending
Source: DHHS, http://www.cms.hhs.gov/statistics/nhe/historical/chart.asp
Percent of health care expenditure
60%
40%
20%
80%
Private Federal State and local
Why is it important?
1. The size of the health economy is large and growing
2. Role of government in the health care markets
3. Medical Market is difference from other markets
How is the medical care market different from other markets?1. Presence of Uncertainty Demand is irregular and uncertain
Accidents, can you deny someone lifesaving care if they don’t have the money?
How is the medical care market different from other markets? Supply–hard to understand the product
Asymmetric information When we are sick we don’t understand the
treatment we need and must trust our doctor in their diagnosis.
Different doctors may suggest different treatments due to uncertainty of outcome.
Hard to judge quality Governments establish licensing requirements to
ensure minimum level of quality
How is the medical care market different from other markets?2. Prominence of Insurance
People buy insurance to cover themselves against the risk of illness.
With third party financing most of the cost of medical care, individuals are insulated from the full cost of the care they receive.
Demand for medical care may rise if you don’t pay the full cost.
Treatment recommendations are adjusted to insurance status.
How is the medical care market different from other markets?3. Large role of not-for-profit providers
Economists usually assume firms maximize profits.
There are many not-for-profit hospitals (85%). How should economists model their behavior?
4. Role of equity and need Belief that people ought to get health care
whether or not they can afford it. Economists need to take this feature of the
good into consideration.
Why is it important?
1. The size of the health economy is large and growing
2. Role of government in the health care markets
3. Medical Market is difference from other markets
4. Externalities
Externalities
Communicable disease A disease that is transmitted through direct
contact with an infected individual or indirectly through a vector (e.g. mosquito).
Significant reduction in their spread account for much of the improvement in health in developed countries Malaria, TB, vaccine preventable diseases
Still a significant problem in less developed countries
Externalities
Individual behaviors (smoking, over eating) Direct impact on health of person and others Impacts the cost of health
premiums –i.e. lung cancer
Impact on demand for health care
Cause of death
14
4843
77
99
0
10
20
30
40
50
60
70
80
90
Developed Regions Developing Regions
Percent
Communicable Non-communicable Injuries
Source: http://ucatlas.ucsc.edu/health.php
Causes of Death in US, 2000
Source: Mokdad et al, 2004
What questions do health economics ask?
What role should the government play in health?
What health care investments should a developing country make?
What advertising should be banned? What is the optimal design for health
insurance? Why has health care become so expensive?
What questions do health economics ask?
Does health care early in childhood lead to improved cognition and higher incomes in the future?
Have Medicare and Medicaid increased utilization and improved health outcomes?
Do different methods of doctor payment change quality of care, outcomes or costs?